Inventory challenges can be the doom of retail businesses. It’s hard to recover from major stock-outs or overstocks, and any discrepancies can lead to higher costs due to waste, storage requirements, and labor requirements. One way you can prevent such instances is through inventory forecasting.
Inventory forecasting is a practice that relies on data analysis to predict future inventory demands. Specifically, by leveraging historical data and staying informed about emerging trends and upcoming events, you avoid unproductive inventory.
Inventory forecasting is a safeguard against under-stocking or overstocking. When employed effectively, this practice reduces waste and helps ensure that you don’t tie down your cash unnecessarily.
To forecast your inventory accurately, you need to do more than just identify a reorder point. Inventory forecasting is about more than inventory replenishment. You must conduct data analysis to identify trends and adapt to changing customer demand and conditions.
Inventory forecasting benefits
The purposes of inventory forecasting is threefold:
- Minimize your holding costs
- Minimize lost sales revenue
- Reduce product waste
Accounting for uncertainty
Any business producing at scale must consider sound inventory forecasting strategies. However, the advantages are even more important for companies that experience fluctuating demand. Inventory forecasting is used to account for:
- Historical data
- Seasonal fluctuations
- Other external factors
Less inventory needed
With competent inventory forecasting, you don’t need a giant warehouse full of products collecting dust. It is more profitable and simpler to use data to maintain an adequate inventory. With inventory forecasting, you ensure that you don’t purchase unnecessary stock. This is a crucial step toward balancing your cash flow.
Less labor
Lower and more efficiently managed inventory translates into less labor. Warehousing costs are reduced through fewer special requirements. Similarly, needing less time spent handling inventory means employees' attention can be directed elsewhere.
Predicting labor needs is closely connected to predicting inventory needs. Moreover, while the analysis takes time, stock management requires less resources as inventory forecasting helps:
- Predict changes in order volume
- Automate reordering
- Reduce inventory carrying costs
All of this reduces your warehouse management and staffing needs.
Fewer stockouts
Ideally, inventory forecasting must eliminate stock-outs/back orders. Adequate inventory levels contribute to a more fluid cash flow.
Additionally, eliminating back orders may further improve profitability by increasing customer satisfaction.
Inventory forecasting vs demand forecasting
The purpose of demand forecasting is to determine an approximate figure of customer demand for a product or service. Whereas inventory forecasting is conducted to estimate the necessary stock levels to predict demand, while also minimizing the costs of carrying inventory and the risk of running out of stock.
How to forecast inventory?
Often, inventory management relies on intuition and practical knowledge. However, there are four concrete approaches to inventory forecasting based on data to remove any guesswork.
Quantitative forecasting
Quantitative forecasting applies historical sales data to predict future sales. With an extended period of operation, your business will have access to more information, leading to improved forecasting abilities.
In general, you need at least one full year’s data to gain the most useful insights. Accounting for seasonal variation, for example, requires at least one year. But in the end, the more data, the better.Quantitative forecasting is most often more accurate than alternatives. However, you require adequate historical data for it to be meaningful.
Qualitative forecasting
Qualitative forecasting employs order history information and relies on research of external factors like: market trends, economic trends, environmental factors and other macroeconomic factors.
Expert analysts are consulted for thorough and meaningful qualitative forecasts. As a method, it is more demanding and requires more skill than quantitative forecasting. But it presents a solid alternative to quantitative forecasting when you lack the history to conduct it.
Trend forecasting
Trend forecasting uses sales trends and market growth data to predict future inventory requirements. It requires your business to closely monitor sales data and big-picture changes such as consumer behavior trends. This means going beyond seasonal changes, which are excluded, and delving into market-wide trends.
Trend forecasting makes use of granular sales data. Marketers then use that data to prepare for emerging trends and benefit from them. For the same reason, inventory management is made more efficient due to predicting future demand.
Graphical forecasting
Graphical forecasting refers to the process of converting sales history into visual representations. This strategy is employed to guarantee that nothing important is overlooked when represented solely in written form.
The use of graphical forecasting is a simple and uncomplicated task. It automatically generates trend lines and visual representations of noteworthy trends that should be explored further.
Which inventory management method is the best for you?
Data is vital to the success of any organization. Which inventory forecasting method you use is based on what data is available to you.
We always suggest extensive market research as well as forecasting for pricing and inventory. Simon-Kucher offers commercial growth strategies to help consumer businesses to thrive amid intensifying market factors.
Understanding your price elasticity
With an understanding of price elasticity, you can better anticipate how changes in pricing will affect sales volume. This helps improve the accuracy of inventory forecasts.
Price elasticity measures how changes in price relate to changes in demand. If demand for a product is highly elastic, a small price change may result in a large change in demand.
Understanding your business's price elasticity is another factor that requires data analysis. Several factors contribute to price elasticity:
- The availability of alternatives
- Whether you’re selling an essential or a luxury product
- Customer incomes
- Market trends
Price elasticity has implications for your inventory, discount, and pricing strategies. We can help you determine your price elasticity and walk you through the implications that the data carries.
Improving your pricing and sales strategies
Lastly, inventory forecasting is closely related to your pricing and sales strategies. The reduction of surplus inventory poses challenges both in sales and forecasting.
We often help companies stimulate demand for their products to reduce their excess inventory. Normally, dynamic pricing strategies and promotions play a key role in this process.
Dynamic pricing strategies enable your business to adjust prices proactively as external factors change. This is one of the key ways you can control your inventory and avoid excess. Companies aiming to achieve this alongside higher profits can use:
- Discount pricing strategies
- Bundle offers
- Price optimization
Simon-Kucher’s growth solutions allow you to capture significant opportunities by optimizing every single lever of your commercial strategy. To find out how our powerful insights can enable you to create confident pricing, sales, and marketing strategies, contact us today.
